Forbearance lending and soft budget constraints in a model of multiple heterogeneous bank financing

Tobias Schüle

No 303, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: Empirical evidence suggests that banks often engage in refinancing of intrinsically insolvent debtors instead of writing of their non-performing loans. Such forbearance lending may induce soft budget constraints for the debtors, as it diminishes their incentives to thwart default. This paper introduces a model of coordination failure to analyze how a relationship bank affects the incidence of forbearance lending and soft budget constraints by signaling its credit decision to other creditors. We find that the relationship bank's signaling ability enhances its incentives to engage in forbearance lending and infuences the conditions under which debtors face soft budget constraints.

Keywords: coordination failure; global games; asymmetric information; forbearance lending; soft budget constraints (search for similar items in EconPapers)
JEL-codes: C72 D82 G21 G33 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:303

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